Sugar: Supplies bursting at the seam, or are they?

Focus on Futures: Sugar

Sugar prices have fallen to two-and-a-half year lows amid forecasts for an ever expanding 2012-13 global production/consumption surplus. The International Sugar Organization (ISO) has been revising its forecast higher, with its current estimate at 6.2 million tonnes, but some estimates are more than double that figure, at more than 12 million tonnes.

The Brazilian crop staged a dramatic midseason recovery. At one point it seemed that production would fall behind 2011-12 output, but the weather improved. Thus far, Center South output is running about 9% higher than the previous season’s. Quite a turnaround.

Estimates for Indian output have edged slightly higher, to 24.3 million tonnes. After liberalizing the export market, exporters shipped 3.5 million tonnes in 2011-12. Export flows were expected to continue, but there has been very little activity on that front this marketing year. That is probably further indication that supplies from traditional channels are ample.

In terms of the supply side, there seems to be more of the same up ahead. Early forecasts for the 2013-14 Brazilian cane crop call for a 10% increase over the current crop. At first glance that would appear to be devastatingly bearish. There are a number of factors to consider, though.

The ethanol/sugar ratio has fallen substantially from a peak of more than 60% a few years ago to 51% this year. There are two reasons Brazilians will be forced to produce more ethanol in the coming months and throughout the new marketing year. First, the percentage of ethanol required to be used by motorists is set to increase from 20% to 25% by June 1 or earlier. Then there is the export market to consider.

In our last article on sugar, we said that optimistic estimates for Brazilian ethanol exports for 2012-13 were as high as 2.55 billion liters. That figure has now jumped to 3 billion liters, with forecasts for 2013-14 as high as 4 billion liters.

Forecasts for the 2013-14 ethanol/sugar ratio are as high as 54%. With the U.S. taking about 85% of Brazilian ethanol exports and ethanol prices becoming more competitive with petroleum prices as crude oil moves dangerously close to $100 per barrel, it is hard to say how much ethanol demand may grow.